UK: Labour's labour problem - Standard Chartered

We lower our 2025 growth forecast to 1.0% (from 1.3%) owing to the slowdown in H2-2024. The UK labour market looks susceptible to further weakening as firms face multiple headwinds. This could exert downward pressure on wage growth, raising the risk of a faster BoE cutting schedule, Standard Chartered's Economists Christopher Graham and Saabir Salad report.

Growth momentum still weak

"The UK economy grew 0.1% q/q in Q4, resulting in full-year growth of 0.9% last year. We still expect slightly stronger growth in 2025 as gradual monetary easing supports the household sector and the government's pro-growth measures help to boost capital investment. However, given the lack of momentum in H2, as well as our expectation of additional fiscal tightening on the spending front in the coming months, we lower our 2025 growth forecast to 1.0% from 1.3% previously."

"A natural process of rebalancing post-COVID has resulted in a labour market 'broadly in balance', according to the Bank of England (BoE), with vacancies back to pre-COVID levels. However, employment growth has been steadily declining and recent surveys point to pressures on firms stemming from government fiscal policy, including the rise in employer National Insurance Contributions (NICs) announced at last Autumn's Budget and the upcoming rise in the national minimum wage (both set to come into effect in April)."

"Given weak growth momentum and elevated energy costs, labour demand could come under sustained pressure going forward. The BoE's reaction function to labour market data is not straightforward, given not only inflation dynamics this year but also data quality issues on the labour market side. However, on balance, we would expect a faster pace of rate cuts from the BoE should labour market metrics show a clear deterioration."